If the One Big Beautiful Bill Act (OBBBA) feels like a tidal wave of tax changes, you’re not alone. In this webinar, Laura Detsch, Tax Specification Compliance Manager, and Josh McCullough, Chief Marketing Officer, provided clarity on tip deductions, overtime handling, W-4 and W-2 changes, and how to approach this transitional year with confidence.
Below, we break down what was known when the bill was first enacted — and highlight the critical updates payroll and HR leaders need to prepare for.
⚠️ Note: This content is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization’s internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.
Watch the full webinar here:
The “no tax on tips” campaign headline is technically a deduction, not an exclusion.
What We Knew
What We've Learned
Qualified tips must meet two key conditions:
What Doesn’t Qualify
Programs like TRDA (Tip Rate Determination Agreement) and GITCA (Gaming Industry Tip Compliance Agreement) allow employers and employees to agree on a standard tip rate (e.g., 12% for servers, 18% for dealers). If tips are reported at or above that rate:
“If it’s voluntary, it’s a tip. If it’s automatic, it’s wages.”
These fields are officially approved and will appear on W-2s for tax year 2026:
Reminder: The tip deduction only applies to federal income tax — tips are still subject to FICA taxes (Social Security & Medicare).
One of the most technical — and often misunderstood — parts of OBBBA.
What We Knew
What We’ve Learned
The IRS has clarified that only the FLSA premium portion of overtime qualifies — meaning only the 0.5x premium on hours worked beyond 40 per week counts.
You cannot deduct:
To comply, you’ll need to separate FLSA-qualifying OT from state- or union-specific OT. This includes:
This field is officially approved and will appear on W-2s for tax year 2026:
The IRS has released a draft W-4 for 2026 with a dedicated worksheet to help employees reflect OBBBA deductions in real time.
What’s New in Step 4(b):
Employees must manually update their W-4 to reflect these deductions. Employers should not adjust withholding automatically. Payroll systems should retain W-4 copies and apply IRS withholding formulas based on submitted data.
The IRS has approved a new W-2 format for TY2026 with expanded code support.
Box 12 Codes:
Box 14:
Employees with multiple tipped roles: We suggest using the occupation code for the job where they earned the most tips (please note that the IRS has not yet clarified this rule).
The 2025 tax year is a transitional period — while new codes won’t apply yet, employees can still claim deductions using Schedule 1A on the IRS Form 1040.
What Employers Should Do:
Note: If you cannot isolate FLSA premiums exactly, a rough starting point may be to estimate 1/3 of total overtime as the premium portion. This is a suggestion and is not formal tax advice. Be sure to maintain internal records however you choose to calculate this number in case of an audit.
The clock is ticking — and year-end prep for OBBBA compliance starts now. Build structure before reporting is mandatory. Whether you're adjusting W-4s, breaking out premium pay, or estimating deductions for 2025, Greenshades is building future-ready tools to support you.
Are you sure your current payroll system is ready for OBBBA? Schedule a demo of Greenshades to discover the difference.
⚠️ Reminder: This content is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization’s internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.
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For clarificaton, qualified tips and cash tips will be reported in Boxes 14 and could be different than what will be in box 6 and 7? |
No. Box 6/7 (Medicare and the tips boxes) stay as they’ve always been. For 2026, qualified tips go in Box 12 using TP/TS (plus TT for FLSA OT, TA for Trump accounts). Box 14B (in 2026) is for the Treasury occupational code (informational). For 2025, Box 14 can be used informationally to share estimates, but it doesn’t replace Boxes 6/7. |
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Box 12, Code TT is for 2026 W-2, right? How do we report for 2025? |
Yes—TT appears on the 2026 W-2. For 2025, IRS hasn’t given final reporting guidance. Employers should provide good-faith estimates (transitional relief) via pay stubs and/or Box 14 (informational) and document how estimates were derived. |
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Does vacation or holidays that are not worked counted toward the calculation of overtime? |
No. Only hours physically worked count toward the 40-hour FLSA threshold. Vacation/holiday time does not count toward qualified OT |
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Am I to understand that our Union workers that are paid OT after 8 hrs DAILY will need to be tracked on weeks that exceed 40 hours worked only? |
You must pay per the union rules, but only the FLSA overtime premium over 40 in the workweek is qualified for the deduction. So yes—track weekly >40 hours for the qualified portion. |
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Is Greenshades gonna track the OT that goes in box 12 or do we have to track on an excel spreadsheet? |
If you’re a Greenshades Payroll client: the system calculates the overtime premium, splits regular vs OT automatically, syncs W-4 changes, and a report for the OT premium is coming. If you’re not a payroll client, it depends on your payroll system (you may need your own tracking). |
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How does no tax on OT apply for those having a 9/80 work week with occasional OT? |
Federal Department of Labor has a Fact Sheet #54 that addresses the 8/80 overtime system. This exception to the standard FLSA overtime rule is found in section 7(j) of Regulation 29 CFR 778.601. If you are fully compliant with this exception, then yes the overtime premium will be qualified overtime for OBBBA. |
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Is the IRS providing guidance on the "estimates" or can employers define it. |
IRS has offered transitional relief for 2025 allowing best estimates, but no specific IRS method yet. Employers should create reasonable, documented estimates. |
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Will Greenshades be able to separate out the OT premium when an employee works at different rates and has a blended overtime rate? |
Greenshades Payroll will calculate the overtime premium and automatically split regular vs OT; a dedicated OT premium report is planned. |
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Does standby time count toward qualified OT? |
There has been a number of law suits over this. If you are in a state that the court has ruled that the standby time must be paid, it will count towards the 40 hours for FLSA paid overtime. |
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Is it true that shift differential overtime is not included in this? |
There is a shift differential rate of pay that depends upon the shift that you are working. That rate of pay is factored in the calculation of the "regular rate of pay" that is used to pay the overtime premium. [Note: Our compliance manager was unsure about the specifics of this question and gave the best answer possible. If you would like to discuss this further, reach out to us. Thank you!] |